Technology

1
Technologys the answer! (but what was the
question?) Analytic and Transatlantic divisions
in responding to climate change Presentation to
HGDC seminar, 19 November 2003
Michael Grubb Associated Director of Policy, the
Carbon Trust Visiting Professor, Climate Change
and Energy Policy, Imperial College London Senior
Research Associate, Department of Applied
Economics, Cambridge
2
Overview

• The basic issue of technology-push vs
  demand-pull - examples and significance
• Economic theory and technology innovation
• The different conceptions evidence, strengths
  and weaknesses
• Integrated perspectives
• Practical problems arising from incomplete
  theories of innovation
• Some implications for UK strategy
• Technology perspectives and Kyoto strategies
• Some additional observations on energy policy and
  technology
• Conclusions

3
The basic issue

• Technology is the answer!
• All studies agree that low carbon technology is
  central to addressing long-term climate change
• Technologies adequate to stabilise the atmosphere
  are not yet commercially available
• But what was the question?
• Is this a question of RD investment by
  governments to develop the technologies that can
  solve the problem (technology push / exogenous
  technical change)?
• Or a question of market incentives to promote
  private sector investment in emerging
  technologies and learning-by-doing (demand pull
  / induced technical change)

4
Global Development of Wind Power capacity
Source Morthurst, Riso national laboratory
5
Cost trends in wind energy, historic and
projections compared to conventional power
production
Source Morthurst, Riso national laboratory
6
Induced technical change can revolutionalise the
long term view results of IIASA studies with
induced innovation
Source Gritzevski Nakicenovic, in Energy
Policy, 1999
7
.. And fundamentally affect international
strategy Induced technology policy
spillovers determine long-run effect of
Kyoto-style agreement
FirstCommitment Period
Zero Spillover Scenario
14,000
12,000
Developing Country Emissions
10,000
Intermediate Spillover Scenario
8,000
Carbon Emissions (MTCpa)
6,000
Maximum Spillover Scenario
4,000
2,000
Industrialised Country Emissions (Kyoto -1 pa)
Source Grubb, Hope and Fouquet, in Climatic
Change, 2003
8
Overall, different conceptions of technical
change can radically affect the policy conclusions
Issue Technology-push Govt RD-led technical change Market pull Demand-led technical change
Implications for long-run economics of large-scale problems (eg. climate change) Atmospheric stabilisation likely to be very costly unless big RD breakthroughs Atmospheric stabilisation may be quite cheap as incremental innovations accumulate
Policy instruments and cost distribution Efficient instrument is government RD, complemented if necessary by externality price (eg. Pigouvian tax) phased in. Efficient response may involve wide mix of instruments targeted to reoriented industrial RD and spur market-based innovation in relevant sectors. Potentially with diverse marginal costs
Timing implications Defer abatement to await technology cost reductions Accelerate abatement to induce technology cost reductions
Carbon cost profile over time Carbon cost starts small and rises slowly till meetings technology (Hotelling principle) Big investment in early decades, cost declines as learning-by-doing accumulates
First mover economics of emissions control Costs with little benefits Up-front investment with potentially large benefits
Nature of international spillover / leakage effects arising from emission constraints in leading countries Spillovers generally negative (positive leakage) due to economic substitution effects in non-participants Positive spillovers may dominate (leakage negative over time) due to international diffusion of cleaner technologies
Source Grubb, Koehler and Anderson, in
Ann.Rev.Energy, 2002
9
Economic theory and environmental innovation
policies
10
Technology-RD push the track record is not
encouraging..

• The theoretical basis
• Classic RD market failures
• The impact of liberalisation
• Some classic energy examples
• Nuclear fission
• Coal-based synthetic fuels
• Nuclear fusion
• Basic problems of
• picking winners
• Cooperation vs competition
• Policy displacement
• Theoretical paradox of the classical view
• the giant leap
• the valley of death

11
Demand-led induced technical change if only
markets were so perfect ..

• Some classic energy examples
• North sea oil
• CCGTs
• Wind energy ?
• Basic problems of
• Classic RD failures
• Policy stability for environmental innovation
• The real world is second best
• Theoretical paradox of the classical demand-led
  view
• the need for perfect RD markets
• The need for long term certainty
• The need for perfect communication between
  government, research, and industry

12
Integrated perspectives technologies have to
traverse a long, expensive and risky chain of
innovation to get from idea to market
Government
Policy Interventions
Diffusion
Market accumulation
Commercial-isation
Demon-stration
Applied RD
Basic RD
Market Pull
Research
Consumers
Product/ Technology Push
Investments
Business and finance community
Source Foxon (2003) adapted by the author
13
There are extensive barriers to investment that
differ along the innovation chain
Market accumulation
Commercialisation
Demon-stration
Applied RD
Basic RD
Diffusion
Social
n
Political
Technical
Economic
High
Medium
Low
14
Market theory is blind to the innovation process
innovation assumed to emerge out of RD and
market pull, with government no-go zone in between
Government
Carbon trading / taxation
Policy Interventions C,C,C
Univ funding
Cofunding, tax breaks
Diffusion
Market accumulation
Commercial-isation
Demon-stration
Applied RD
Basic RD
Market Pull
Research
Consumers
Product/Tech Push
Investments
Business and finance community
C,C,C Contentious, constrained, confused
15
Consequently we lack integration across the
innovation chain

• New entrants (technology and corporate)
• require / billions, and years, of development
• Compete against established incumbants and rules
• Rely upon regulation to embody external costs of
  incumbants
• political signals of future regulation are not
  bankable
• (White paper reactions)
• fierce market competition and regulatory change
  in electricity has left
• Financial community extremely risk averse
• companies without financial resources for longer
  term investment
• (CMI reactions)

16
Some elements of integrated strategies -
application for the UK
17
A range of policy measures are needed to help
technologies traverse the innovation chain
Illustrative
Appropriate economic support for specific
technologies will vary as costs decline
Technology specific support
RDD Grants
Capital Grants/ Loans
ROC (Buyout)
General support
CCL Exemption
Wholesale Price
Note ROC excludes recycling Capital grant
based on maximum of 40 of typical capital
costs Source PIU Working Papers (OXERA II Base
case cost decline)
18
Support needs to target advantaged technology
groups and build upon comparative advantages-
whilst market used to identify winning solutions
Assessment Criteria
Funding Prioritisation
Co-operate Internationally
Invest Aggressively

• High Domestic Resource
• High Materiality
• Early mover advantage
• Value added potential

Technology Groups
Estimated impact
BuildOptions
Watching brief
UK comparative advantage
19
Carbon Trust Low Carbon Technology Assessment
seeks to classify main technologies on these
bases
High

• Focus
• Buildings (Fabric, Ventilation, Cooling,
• Integrated Design)
• Industry (Combustion technologies, Materials,
• Process control, Process intensification,
• Separation technologies)
• Hydrogen (Infrastructure, Production,
• Storage and Distribution)
• Fuel cells (Domestic CHP, Industrial
• and Commercial)
• CHP (Domestic micro, Advanced macro)
• Biomass for local heat generation

• Monitor
• Buildings (Controls)
• Waste to energy
• Nuclear fission
• Ultra-high efficiency CCGT
• Smart metering
• Wind
• Fuel Cells (Transport, Baseload power
• Biomass for Transport
• Industry (Alternative Equipment)
• CO2 sequestration

Estimated impact on carbon emissions

• Limited
• Intermediate energy vectors
• HVDC Transmission
• High Efficiency Automotive
• Power Systems
• Nuclear fusion
• Cleaner coal combustion
• Solar thermal electric
• Low head hydro
• Tidal (Lagoons, Barrages)
• Geothermal

• Consider
• Solar Photovoltaics
• Solar water heating collectors
• Photoconversion
• Wave (Offshore, Near shore devices and
• shoreline)
• Biomass for local electricity generation
• Tidal stream
• Coal-bed methane
• Electricity storage technologies
• Buildings (Lighting, Existing building fabric,
• Existing building services)
• Industry (Waste heat recovery).

Low
Low
High
Materiality of potential Carbon Trust investments
20
Some implications for Kyoto implementation and
strategy
21
Kyoto commitments and trading potential- a low
or zero price will not aid technology development!
Gap between present (yr 2000) emissions and Kyoto
target,and managed forest allowances (MtC/yr)
22
Analogies with the oil markets?

• The oil market
• International traded price far greater than
  marginal cost
• Major swing suppliers have big influence but
  not monopoly power
• Price instability has forced restructuring of
  markets and relationships
• International collaboration to maintain oil price
  at reasonable levels
• Strong government-industry interrelationships
• Kyoto CP1 carbon market could have all these
  features
• (Russia as the Saudi Arabia EITs as the OPEC
  DCs as non-OPEC)
• But important differences
• Constructed commodity, depends upon institutional
  credibility (compliance, etc)
• Heirarchy of environmental and political
  legitimacy
• Sequentially negotiated allocations
• CP1 massive supply-demand imbalance created by US
  pullout

23
Implications for the Kyoto mechanisms - projects

• Heirarchy of value led by project mechanisms
• CDM, small projects
• renewable energy may be highest value
• Potential for early start (Delhi, COP8)
• Other CDM
• JI track two dependent upon Supervisory Cttee
• JI mainstream, forward trading contingent on
  meeting eligibility, probably looser project
  governance
• Removal Units (Annex I sink projects) variable
  domestic price, low international price
• Total volume from international project credits
  limited

24
Implications for the Kyoto mechanisms
emissions trading

• Heirarchy within AAU trading
• Greened trading revenues linked to
  environmental reinvestment (Russian Green
  Investment Scheme)
• OECD countries that exceed their targets due to
  domestic action (eg. UK?)
• EIT exports governed through non-GIS-type routes
  (eg. through domestic trading with acceptable
  allocation).
• wholesale transfers of AAUs without any linkages
  or constraints (will this happen at all?)

25
Some broad conclusions on innovation

• Supply push vs demand pull conceptions lead
  to radically different perceptions and policy
  prescriptions
• An important obstacle to effective policies is
  inadequate economic combined theories of
  industrial innovation (and especially
  environmental innovation)
• standard theories yield policies that are
  limited in their feasibility, effectiveness and
  dynamic efficiency
• We have no goods tools to design the most
  dynamically efficient mix of policies
• But it is clear that effective policies are
  impeded by one size fits all application of
  core policies, such as
• New Electricity Trading Arrangements (NETA)
• European State Aids
• Coherent policies need to work across the
  innovation chain and be clear about strategic
  priorities and comparative advantages
• Kyoto commitments and Kyoto-style structure is a
  foundational element to give incentives and
  develop global markets

26
Supplementary thoughts On UK energy prospects
and energy diversity
27
UK electricity mix under business as usual
gas dominates
UK supply reference scenarioElectricity
Supply - MtOe
Renewables
Nuclear
Gas
Coal
Note Assumes no new nuclear build Sources DTI -
IAG, DUKES, EP68
28
Greater effort on variety of renewables would
lead to a more diverse set of energy sources
UK supply Renewable Energy scenarioElectricit
y Supply - MtOe
Imports
Nuclear
Renewables
Oil
Coal
Gas
Source CT Strategic framework analysis
29
Diversity can be quantified and is enhanced under
an increased renewables scenario
UK electricity supply mix scenariosDiversity
index
Renewables Scenario
Business as Usual scenario
Source CT Strategic framework analysis
30
Diversity index and concentration charge

• Diversity index for portfolio of I options
  -?ipi . lnpi
• where
• pi the proportional reliance on the ith
  technology / fuel source
• To encourage diversity, could levy a
  concentration charge, eg.
• (exppi 1) cents /kWh
• Would
• increase marginal cost of given source as it
  starts to dominate
• give modest boost for new entrants
• UK at present relatively diverse politically
  palatable starting point!

31
Conclusions 1 Implications of technology
innovation analysis

• Modern understanding of the economics of
  industrial innovation (and especially
  environmental innovation) need to be codified and
  applied to inform policy
• A mix of policies is required for different
  stages of the innovation chain through from
  research to market
• Core established policies need to be adapted to
  avoid being impediments
• International economic studies need to
  incorporate technology (and political) spillovers
  as well as economic substitution effects
• The debate on targets vs technology is false
• Technology policies without targets (cap trade)
  are ineffective
• Targets without technology policies are
  inefficient
• Kyoto provides a bedrock of credibility and
  carbon markets but much more needs to be done
  on technology to enable deeper and wider cuts in
  subsequent negotiating rounds

32
Conclusions 2 supplementary observations on
climate-technology policy

• The challenge is not adding abatement costs to
  do nothing future, but is to reorient /
  trillions of investment over coming decades
• IEA World Investment Outlook
• This will not happen without active intervention
  domestically and internationally
• Innovation is too risky, the bankable signals
  of political declarations and agreements are too
  weak, and the obstacles to new entrants are too
  big
• Low carbon sources can generally support security
  objectives, but need appropriate tools to support
  new entrants rather than protect high carbon
  existing options
• A concentration charge to foster system
  diversity could be considered